Baidu Industry Analysis

Abstract

There are several external and internal factors that have significantly improved the company’s performance, and a group of investors have taken note of this growth. These investors have scheduled a meeting next month to secure an infusion of $100 million in new capital that will significantly expand the company’s operations. This document aims at responding to specific questions in regard to industry analysis. The answers contained in this report will offer an overview of the industry and company that will be presented to the investors. The report has 5 sections; the first 3 sections include the introduction, economic drivers and the Porters Five Forces, while the last two sections present the pricing practices and economic outlooks.

 

Introduction

China has shifted from a closed economy to a more market oriented economy that plays a key role in global trade. By 2010, China had already become the largest exporter in the world. On the contrary, USA remains the largest economy with a GDP of $ 50,100 whereby both the private firms and individuals make most of the economic decisions. The government also buys most of its goods and services from the private sector. China has successfully phased out most of the collectivized sectors in the economy and replaced them with sectors that are autonomous, have liberalized prices and are more open to global trade and investments. This section of the report aims at describing the company’s major products and services from an economic perspective to gain a better perspective of how the company is positioned in the economy.

The company, product, and services

Baidu is a web based company that primarily focuses on the Chinese market despite its recent IPO offer in the US. Baidu offers several services, but its major products include a search engine and an online encyclopedia. The company was established in 2000 by two Chinese nationals namely: Robin and Eric who have both studied and worked in the US. Recent accomplishments include the 2015 Alexa Internet ranking platform that ranked Baidu at 4th place overall (Back, 2015).

Market sector and industry

According to Barboza (2006), it was estimated that in 2015, there were 5.1 billion search queries in China of which the company had a market share of 62%.  The number of internet users in China had risen to 750 million by January 2016 according to a report by Baidu inc. (2011). The steady growths in the online market sector and emerging trends in the industry have contributed to Baidu’s growth in share revenue. Recent reports have indicated that Baidu’s share revenue in the search engine sector had grown by 7 points in the second quarter of 2015 to 72 % (Cowan, 2005).

Market structure

The market structure in the industry is pure competition with Baidu competing with over 50 search engines including: Yahoo, Google, Microsoft Bing, MSN Messenger and Alibaba. The major competitor is Qihoo 360 with a market share of 12 %. The company launched its search engine in 2015 August and had already gained 10 percent of share revenue in the search engine sector. Following closely were Google, Yahoo, and Sogou (Davis, 2010).

Major products and services

Baidu is a service based company with most of its services using the Chinese language and phonetics in conducting advanced searches, conducting spell checks, getting news, videos, images and any other local information. Baidu’s key services include: Baidu search engine and Browser, Baidu Library, Baidu News, Baidu Map and Baidu Legal Search.

Elasticity and factors affecting supply and demand

Demand for Baidu is highly inelastic; this is because the company can increase the prices for its services without having a corresponding negative effect on demand. Demand has been made inelastic by some of the factors that affect supply and demand for Baidu’s services. These factors include customer loyalty, service quality and government policies (Frakt & Piper, 2014). Baidu’s current clientele are very loyal to the brand mainly because of better services compared to those of its competitors. Government policies have also played a key role in facilitating Baidu’s trade and investments both in the local and international market.

Economic characteristics

Economic characteristics helps at describing the economy of the city or state in which a company operates in. the company operations are based in Haidian district, Beijing China. According to reports by Moss (2007), actors of production such as labor are readily available in Beijing at affordable prices. However, payment for factors of production often may vary from one district to another with Haidian district having the most expensive factors of production including utilities, rent payables and other operating costs.

Noneconomic forces impacting sales and profitability

Some of the non economic factors that have had a significant impact on Baidu’s sales and profitability include: legal and political factors, consumer factors and technological factors.  Emerging trends in legal and political factors in China such as workers rights and labor laws have had a significant impact on the factors of production. Consumer factors and technological factors such as change in population and demographics, new technologies, lifestyles and cultures have also seen more Chinese people embracing services from foreign companies such as Google and Yahoo (Hodge, Schokora, & Liu, 2008).

Economic drivers and risks at Baidu

Macroeconomic drivers and external risks

Some of the major external issues that Baidu and the industry faces are generated by risk drivers that are either external or internal. External drivers include demand risk, supply risk, and environmental. Demand risks relate to the actual disturbances to the flow of information and business transactions between Baidu and the industry. On the contrary, supply risk is those risks associated with Baidu’s suppliers. These risks include suppliers who are unable to deliver services required by Baidu to effectively carry out its operations. Environmental risks are uncontrollable and include interruptions to internet connectivity that may arise due to earthquakes or bad weather (Ren, 2014). Figure 1 below demonstrates the changes in demand that are brought by disturbances in the industry.

Figure 1

Demand changes as a result of disturbance

Price

                                                                                                Quantity of service demanded

(Ren, 2014)

Figure 1 shows that as any disturbances in the flow of information within the industry results to a corresponding rise in prices. This increase in prices results to a corresponding decrease in the services demanded by Baidu’s customers; hence the positively sloped demand curve. On the contrary, supply risk is those risks associated with Baidu’s suppliers. These risks include suppliers who are unable to deliver services required by Baidu to effectively carry out its operations. Figure 2 below demonstrates the effects supply risks have on Baidu’s service delivery. As these disruptions increase, the overall quality of service offered reduces. To compensate for these disruptions, Baidu will opt for new suppliers, which leads to an increase in the cost of production. Figure 2 suggests that an increase in the cost of factors of production results to a decrease in the services supplied to the industry.

Figure 1

Demand changes as a result of disturbance

Cost of

Factors

Of

Production

                                       (Ren, 2014)                                                              Quantity supplied

Microeconomic drivers and internal risks

One of the internal risks Baidu faces is the process risks. Process risks include the disruptions to the company’s managerial activities such as, sustaining a competitive market position in the industry through copyrights and trademarks.

Risk Mitigation

Baidu can better respond to the above drivers and risks by assessing the risks and managing them. Risk assessment will entail developing a risk framework that will be based on the probability of occurrence and severity of each risk. Risk management will entail implementing and integrating the risk framework into some of Baidu’s high impact operations.

Porters Five Forces

Force classification

This section aims at classifying each force as weak, strong, or neutral. The first force is Baidu’s Supplier Power, which is classified as weak. Currently there are numerous suppliers for Baidu supplying software services. These suppliers have little control over Baidu and the company has several supplier choices.  The second force is the buyer’s power, which is weak. There are over 750 million online users in China and Baidu enjoys over 60 percent of this market (Winkler, 2010).  Therefore, buyers do not have a strong influence over the prices set forth by Baidu in the industry. The third force is competitive rivalry, which is neutral. The company has a huge market share; however, competition from foreign companies such as Google is high and has a significant impact on Baidu’s market share. The forth force is threat to substitution, which is weak. Substitution for Baidu services is difficult among the 60% royal clientele. The fifth and final force is the threat to new entry, which is strong. There lacks a strong barriers to entry into the Chinese online industry.

Rationale for selecting the Porters Five Forces classification

The porter’s 5 forces analysis is one of the most useful tools for investors in a company to analyze the industry and understand the results of operations in a business. The analysis is based on observations that have been made on profit and loss margins and how they vary between industries. It will therefore help the group of investors scheduled for a meeting next month to gain a comprehensive understanding of Baidu in relation to the industry.

Leveraging information from the Porters Five Forces

Baidu can use information from the Porters Five Forces to gain a clear understanding of its position in the industry. This will allow the company to take advantage of its strengths and improve on its weak areas, as well as, avoid making wrong investment decisions. From the information above, the company exists in a highly competitive industry whereby Baidu is the most competitive (Yu, 2015). However, as indicated by the competitive rivalry force, the company should invest more on marketing to ensure it maintains its market position in the long run

Pricing practices

Some of the more common pricing practices utilized by Baidu and the industry as a whole include: the High-low pricing and Penetration pricing. The high-low pricing practice entails pricing services higher than the competitors, but offering lower prices on key services (Yu, 2015). This pricing practice is mainly sustained in the industry through aggressive promotions and advertisements. The penetration pricing practice employed by Baidu and most of the companies in the online industry entails setting low prices with the aim of attracting more customers and increasing market share (Yu, 2015).

Pricing discrimination options

Some of the discrimination options that are not been used but could be implemented include: predatory pricing and premium pricing. Through the predatory pricing strategy, Baidu can drive out some of its key competitors in the industry. The premium pricing strategy will help Baidu in persuading favorable perceptions among its loyal clientele.

Baidu’s short-term and long-term economic outlooks

Investor’s favorable and unfavorable short term outlooks

Given the above investigations into Baidu and its industry, there are several favorable and unfavorable outlooks that investors should expect in short-term period of between 5 to 7 years. Favorable outlooks include an increase in the number of internet users resulting into an increase of market share for Baidu.  Unfavorable outlooks including bridging gaps with rival competitors especially Google who are also coming up with services that are tailor made for the Chinese people (Yu, 2015).

Investor’s favorable and unfavorable long term outlooks

Favorable outlooks in the long term include expansion into international markets and diversifying its range of service offerings. However, unfavorable outlooks in the long-term may include heavy investments from foreign companies that can undermine Baidu’s investments in China.

Conclusion

In conclusion, there exist more favorable conditions for Baidu in China as compared to the US. This may be due to the fact that China phased out most of its collectivized sectors in the economy and replaced them with sectors that were more autonomous and more open to global trade and investments. The company and industry analysis presented in this paper shows there is a favorable outlook for returns of investments both in the short run and in the long run. The porter five forces also suggest Baidu is strategically positioned in the industry. Therefore, there will be a return of investment for the $100 million capital infusion from the investors.

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